Comprehensive Review of Your Rights to a Collection Due Process Hearing Before the IRS

Under certain circumstances and upon the Internal Revenue Service issuing certain collection notices, you have the right to request a Collection Due Process Hearing. Requesting and holding a Collection Due Process Hearing before the IRS Appeals Office can be a very beneficial tool in resolving an outstanding tax liability. The article below provides detailed information relating to a Collection Due Process Hearing.

What is a Collection Due Process Hearing?

A Collection Due Process Hearing is a right afforded to a taxpayer when the IRS has proposed a levy or enforcement action to collect on a tax debt. The hearing allows the taxpayer to work with an impartial appeals officer towards a collection alternative to resolve the debt as opposed to the proposed levy action by the IRS.

When Can a Taxpayer Request a Collection Due Process Hearing?

The most common time a taxpayer has the right to request a Collection Due Process Hearing is upon the IRS issuing a Final Notice of Intent to Levy. A Final Notice of Intent to Levy is also known as Letter 11 (L 11) or Letter 1058 (L 1058). A taxpayer has 30 days from the date on the Final Notice of Intent to Levy to request the hearing.

How Does a Taxpayer Request a Collection Due Process Hearing?

The taxpayer makes the request by filing Form 12153 with the service center or revenue officer who issued the Final Notice of Intent to Levy. Form 12153 is completed with the taxpayer’s general information, the tax periods of which the Final Notice of Intent to Levy was issued upon or included on the notice, the reason the hearing is being requested, and the proposed collection alternative. The hearing request can be faxed and/or mailed to the appropriate party within the IRS.

What Are the Benefits or Potential Benefits of Requesting a Collection Due Process Hearing?

While there are many benefits to requesting a Collection Due Process Hearing, perhaps the biggest or most advantageous benefit is the stay or hold on enforcement action that is afforded the taxpayer when a timely hearing request is filed. When a taxpayer timely requests a collection due process hearing, there is an automatic hold on IRS collection actions such as bank levies, wage garnishments, and other asset seizures. Please note that the automatic stay on enforcement action may not apply when the taxpayer owes 941 employment taxes and the taxpayer is not in compliance with the current quarter. This stays on enforcement, which allows the taxpayer time free of levies and seizures to prepare for the hearing and make a proposal to resolve the outstanding tax liability based upon their current financial circumstances.

Once a Collection Due Process Hearing is Requested, What Can I Expect?

Generally, the taxpayer will receive a notice from the IRS Appeals Office within 30-60 days from requesting the hearing that their hearing request has been received, and an appeals officer will contact the taxpayer once assigned to the case. Thereafter, the taxpayer will receive a notice from the appeals officer assigned calling an initial hearing or conference date. The initial hearing or conference date can be adjusted by the taxpayer, but the taxpayer must contact the appeals officer to reschedule the hearing date. The notice from the appeals officer will generally request additional information the taxpayer wishes to present and produce during the hearing relating to the resolution proposal the taxpayer is proposing. This information could be financial statements and information relating to an installment agreement, an offer in compromise, or perhaps a request that the liabilities be placed in a currently non-collectible status.

What is the Procedure or Process of Working With the IRS Appeals Office?

First, the appeals officer will verify that the IRS has taken all required and legal steps towards a collection of the debt and that the taxpayer has received their proper due process. Further, the appeals officer verifies that they have had no prior involvement with the applicable case or taxpayer and are a true impartial party to the matter. Upon establishing the hearing or conference date, the taxpayer will need to compile the necessary information, documents, and statements to submit to the appeals officer along with their proposal to resolve the tax liability. If the taxpayer was an individual and owed individual income tax, they would draft an individual collection information statement, also known as Form 433A, and compile all of the necessary attachments such as W-2s, income statements for self-employment income, bank statements, current statements for stocks, bonds, 401(k)s, mortgage statements, etc., to verify the income, expenses, and assets stated on the financial statement. If the taxpayer was a business or the applicable individual owned a business, the taxpayer would also need to compile Form 433B, which is a collection information statement for businesses. The taxpayer would use the financial statements and documents to propose an installment agreement or request their liabilities be placed in a non-collectible status. A taxpayer can also request a settlement, known as an offer in compromise, through the hearing process. If a taxpayer requests an offer in compromise through the hearing process, the offer will be submitted by the appeals officer (usually) to the IRS Offer in Compromise Unit, and the appeals officer will maintain the file while the IRS Offer in Compromise Unit makes an initial determination on the offer. If the determination on the offer needs to be appealed to the appeals office and the taxpayer appeals the initial offer determination, the appeals officer will then have control or jurisdiction of the appeal. Inevitably, through the appeals hearing process, the appeals officer will make a determination relating to a resolution of the liabilities.

What Are the Potential Outcomes of Holding a Collection Due Process Hearing?

The outcome or determination issued by the appeals officer through the hearing process may be dictated by the resolution proposed by the taxpayer. If the taxpayer has proposed an installment agreement and the appeals officer and taxpayer agree on the terms and conditions of an installment agreement, the appeals officer will issue a determination that an installment agreement has been reached, and thus, the levy action proposed by the IRS is not sustained. In short, if the taxpayer and appeals officer come to a collection alternative, then the appeals officer will issue their determination stating the agreement that has been reached and that collection action is not sustained. However, if an agreement or resolution cannot be agreed upon with the appeals officer, the determination made by the appeals office will state that the proposed levy action by the IRS is sustained, and thus, the taxpayer is open to enforcement such as levies once the file or case is returned to IRS Collections or the IRS revenue officer.

What if I am Unable to Establish a Formal Agreement Through the Collection Due Process Hearing?

If you cannot come to an agreement with the appeals officer, it does not mean an agreement is not possible. You are still able to enter into an installment agreement or submit an offer in compromise through the IRS Offer Unit, but you would do so outside of the context of the appeals hearing or appeals office. The key would be to work on formalizing or proposing an agreement as quickly as possible after the appeals hearing concludes because, technically, once the matter is back before the IRS Collections Department or the revenue officer, you are subject to enforcement because there is no longer a stay or hold on enforcement.

You may have heard the ads on the radio, maybe seen them on TV, or companies
have even called you about receiving tax relief by settling your tax debts through the IRS Offer
in Compromise Program. Are these ads true?

Can you settle your tax debts with the IRS through an offer in compromise?

The answer is – maybe. The IRS Offer in Compromise Program may allow you to settle your tax debt, but your financial circumstances and other circumstances must make you eligible for the OIC Program. The information below provides a comprehensive look at settling your tax debts through the IRS Offer in Compromise Program.

What is an IRS Offer in Compromise?

In short, this is a tax settlement. You offer the IRS an amount of money to settle your tax debt. Upon payment of the settlement amount, your tax debts
are cleared, tax liens are released, and you owe no tax.

Who is Eligible to Participate in the Offer in Compromise Program?

Technically, anyone can submit an offer in compromise to the IRS. However, the taxpayer must comply for the IRS to process an offer in compromise. Compliance means that all tax returns required to have been filed are actually filed and that any tax payments due have been paid in full. If you are not compliant, the IRS will return your offer in compromise. Additionally, to have a good chance of the IRS accepting your offer in compromise, your recent and current financial circumstances must be in an overall position where the IRS would agree to a settlement.

How Much Will it Take for the IRS to Settle my Tax Debt?

Your IRS offer in compromise, or “settlement amount” is based more on your ability to pay than the total amount of tax you owe. To calculate your offer in compromise amount, the IRS will look at your income and expenses, and your equity in assets. Generally, the IRS will only accept an offer in compromise when, based on your income and expenses and equity in assets, you cannot satisfy your tax liability. There are exceptions and conditions whereby the IRS may accept an offer in compromise even if you have the ability to pay the tax debt in full. These exceptions are discussed in greater detail below.

IRS will initially calculate your offer amount using the following equation: Your disposable income multiplied by 12 or 24 plus your equity in assets. Let’s look at equity in assets first. All of your assets from homes and cars to retirement accounts and bank accounts (and other assets) are considered when the IRS looks at your ability to pay. When considering equity, the IRS will allow reductions of the fair market value of assets and debts on assets. For example, the IRS allows for a 20% reduction when calculating the equity in your home. Thus, if your home had a fair market value of $350,000 and you owed $250,000 on the mortgage for your home, you would have $30,000 in equity for purposes of the offer in compromise calculated as follows: $350,000 x .8 = $280,000 – $250,000 (mortgage) = $30,000 in equity. You also receive a reduction of 20% in the fair market value of retirement accounts, investment accounts, and other assets when calculating the equity for purposes of the offer. Your disposable income is calculated by totaling all income from all sources and subtracting your allowable expenses. Thus, you would include income such as wages, interest, dividends, business income distributions, and other sources in your total income.

Your allowable expenses (also referred to as the national standard for allowable living expenses) are set by the IRS and can be found on the IRS website. The allowable living expenses are dictated primarily by where you live and the number of individuals in your household. Allowable living expenses include food, clothing, housing, utilities, car payments, car operating expenses, and out-of-pocket healthcare expenses. You can claim your actual healthcare expenses if your allowable out-of-pocket healthcare expenses exceed the allowable standard. Once you have calculated your total income and all allowable expenses, the difference is your disposable income, and the figure is multiplied by either 12 or 24 and then added to your equity in assets for the offer in compromise amount. For example, if your disposable income was $600 per month and the only equity you had was in your house per the example above, your over amount would be $37,200, calculated as $600 x 12 + $30,000.

What Forms and Documents Do I need to Submit with my Offer in Compromise?

The IRS has specific forms you need to submit when proposing an offer in compromise. As an
individual, you would complete Form 433A OIC, which is the financial statement whereby you
provide your asset, income and other financial information. In addition to Form 433A OIC, you
would submit Form 656. Form 656 is the form whereby you state your personal information, the
tax years or liabilities you are proposing to settle and the offer in compromise terms (offer
amount and payment terms). The attachments and documents you need to submit with the offer
in compromise will be determined by the items and issues on your financial statement primarily
and perhaps whether or not you are claiming any extenuating circumstances on your offer. For
example, you need to provide your most recent bank statements for all bank accounts, current
statements for any retirement account or investment accounts, current mortgage statement for
any real estate you own, current statement for any vehicle payment showing the monthly
payment and total loan amount and documents such as pay stubs or profit and loss statements to
verify your income. Please note, if you own a business, you may have the requirement to submit
a business financial statement on Form 433B and attach related documents and substantiation for
the business.

Once I Submit My Offer in Compromise What is the Process?

Generally, you will receive a notice from the IRS that the offer has been received and that you will receive contact within 90 days. However, it usually takes about 6 months for an IRS offer examiner to make contact with you with anything material. When the offer examiner does contact you, they may make a request for additional documentation and have a list of questions or issues to discuss to with you. Eventually, the examiner will provide a determination with an equity in asset table and an income and expense table. The equity in assets table will list each asset, the fair market value applied to the asset, the reduction to fair market value (if any), any loan or encumbrance on the asset, and then the equity allocated to the asset. Then all of the equity amounts are totaled. The income and expense table will state the income you claimed and the income as allocated by the IRS, and then all of the expenses you claimed on the 433A OIC financial statement versus the expenses allowed by the IRS to thus calculate your disposable income. The equity in assets and the disposable income are then applied to provide your offer amount.

What Determinations Can The IRS Make on My Offer?

Based upon the figures in your equity in asset table and income & expense table, the IRS can accept the offer as you submitted, reject the offer amount you offered but agree to accept an increased offer amount or reject the offer because your equity in assets and disposable income show that you can full pay the liability. If the IRS does reject your offer, you have the right to request an appeal of the rejection and work with the IRS Appeals Office to see if an agreement on a settlement can be reached.

What Happens When I Appeal The Offer Rejection?

When the offer rejection is appealed, you are assigned an appeals officer to consider the items and issues you disagree with. The appeals officer assigned to your case will send you a notice calling for an initial conference. You are allowed to provide additional information and documentation to the IRS Appeals Officer and the appeals officer will consider all information and make a determination to accept an offer or sustain the IRS’ rejection of your offer. Many offers are accepted through the appeals process and thus one should not lose hope if their offer is initially rejected by the IRS offer examiner.

If the IRS Accepts My Offer in Compromise What Other Obligations Do I Have?

Beyond paying the agreed-upon offer amount, the IRS requires that you remain in compliance by timely filing all returns and paying all taxes for the five years after the offer. If you fail to remain in compliance, the IRS can default the offer and settled liabilities would be due and owed again.

If you have any questions about your offer in compromise, please get in touch with a tax attorney at The McGuire Law Firm or schedule a Free Consultation with one of our 24/7 live agents.